Liabilties the value of liabilities changes by v i x

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Liabilties: the value of liabilities changes by % V - % i x DUR = -5% x 2 = -10% So the value of liabilities changes by – 10% x 100 = -10 million. If assets decrease by $20 million and liabilities decrease by $10 million, then net worth declines by $10 million, or 10% of total assets. Gap analysis measures changes in profits, or changes in the bank’s income stream. Duration analysis measures changes in net worth, or changes in the bank’s market value of its assets and liabilities. 101
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Econ 350 U.S. Financial Systems, Markets and Institutions Class 10 Regulating banks: NEV and CAMELS Through my service on the Board of Directors at Alternatives Federal Credit Union for the last fourteen years, I have witnessed many trends in the concerns of regulators. Regulators often respond to political pressures that are generated by current events. For example, when I first joined the board in 1998, examiners at the NCUA were concerned with the operational risk associated with Y2K. Computer failures when the year turned to 2000 might have caused the credit union to come to a screeching halt. We were required to spend thousands of dollars developing new security procedures, checking computer codes, and installing emergency energy systems in case the electricity failed. Yet January 1, 2000 came and went without incident. Next, September 11, 2001 and the PATRIOT Act caused the federal government, including the NCUA, to become preoccupied with security risk. What if our little credit union in Ithaca, New York was financing terrorism? We were reminded that we were only four hours from Canada and had an international local population due to the proximity to Cornell and Ithaca College. Terrorists may drive down from Canada or infiltrate Cornell and launder money through the credit union. We were forced to create the position of Compliance Officer to make sure that we were complying with the financial provisions of the PATRIOT Act. We were also required to file more reports with the Treasury Department concerning large cash transactions and suspicious activities. Some credit unions were fined for not filing enough Suspicious Activity Reports. In the past ten years we have not found a single terrorist. After a five-year occupation with security risk, the NCUA examiners began to focus more on credit risk and interest rate risk. We were required to devote more effort in documenting our loan portfolio and in underwriting new loans to reduce our exposure to credit risk. These efforts have helped to improve the quality of our loan portfolio, which usually has default rates of less than 2% for most months, even during the financial crisis. NEV analysis To minimize interest rate risk, examiners have recently emphasized the idea of Net Economic Valuation, which is a form of duration analysis. The credit union is required to analyze the effects of changes in interest rates on the value of its assets. liabilities and net worth. Net Economic Valuation asks, how does the value of the institution change with changes in interest rates? Suppose that interest rates decrease by 100, 200 or 300 basis points, or increase by 100, 200 or 300 basis points.
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